Cloud Stocks: 2 Haves and 2 Have-Nots

by Tom Taulli | September 6, 2013 2:07 pm

[1]While in general, the IPOs of cloud companies have performed quite well during the past few years, not every deal has been a slam dunk. Some have been clunkers, and it’s reasonable to expect to see a few more as investor appetites for offerings grow.

I recently talked to Roman Stanek, founder and CEO of GoodData[2], for a little insight on the subject, and I found this quote helpful:

“A company needs to get to the point where the business is repeatable. In the enterprise world, this takes a long time. So if a company is not ready, an IPO can be the wrong move.”

So to separate the wheat from the chaff, let’s take a look at a couple examples of companies that might have been in this predicament, as well as a couple others that were battle-ready for coming public:

Ready: Textura

[3]IPO Date: June 6, 2013Return: 184%

The global commercial construction industry is estimated to be around $7 trillion per year … and yet it’s a market that has gone mostly neglected by tech vendors.

However, the founders of Textura (TXTR[4]) — William Eichhorn, Howard Niden and Patrick Allin — saw this as a massive opportunity, and it put serious work into addressing it.

Textura’s founders spent five months researching the industry. After talking to many general contractors, subcontractors, materials suppliers, architects, banks and insurance companies, they set about to draft patents to protect their innovative software ideas! Now TXTR is in an ideal position.

Textura operates a platform that includes a full-fledged suite of applications to provide for construction payment management, electronic signatures, processing of legal documents, review and routing of project submittals, estimates, bidding and risk assessment. It even has the capability to deal with the complicated issues of the environmental certification process.

Textura also has an advantage in that it’s service is based on collaboration — customers ideally will encourage other parties to use the system to improve construction projects.

In tech-speak, the application is “viral.”

While Textura still has work to do on the profitability front, growth is plain for all to see. In the latest quarter, TXTR’s revenues jumped 65% to $9.4 million, and they doubled for fiscal 2012 to $21.7 million.

Ready: Workday

[5]IPO Date: Oct. 11, 2012Return: 164%

Workday (WDAY[6]) is focused on the enormous market opportunity of enterprise resource planning applications for the Forbes Global 2000.

For the most part, the top players in the space include SAP (SAP[7]) and Oracle (ORCL[8]) … but that’s actually good news for Workday, as these legacy companies’ systems are complicated, expensive and mostly out-of-date. Thus, it’s been easier for WDAY to snag top-notch clients including AIG (AIG[9]), Four Seasons Hotels, Kimberly-Clark (KMB[10]) and Lenovo (LNVGY[11]).

As should be no surprise, building ERP software is a tough proposition, as it involves managing critical functions of a company like payroll, HR and financials. But the co-CEOs of Workday — Aneel Bhusri and David Duffield — are veterans of the ERP market, having helped to build PeopleSoft, which was the pioneer in the space.

Building another Workday likely would require huge amounts of capital to hire engineers, build a secure infrastructure and put together a large salesforce, as well as time to gain credibility. Customers want to make sure an ERP system is rock-solid before making a purchase decision.

Like Textura, Workday’s second-quarter revenues spiked — in WDAY’s case, by 72% to $107.6 million — and fiscal 2013 revs of $273.6 billion were more than double the previous year’s.

Not Ready: Tremor Video

[12]Date of IPO: June 26, 2013Return: -18%

Tremor Video (TRMR[13]), which operates a video ad network, had a rough IPO. The company priced its deal at $10, which was below the expected $11-to-$13 range. By the end of its first day of trading, shares were off by 15%.

And this happened despite Tremor being a top company in its industry.

TRMR’s core technology, called the VideoHub, allows customers to display their ads across desktop computers, smartphones, tablets and even connected TVs. The network includes about 500 websites and mobile apps, with more than 200 involving exclusive partnerships. And Tremor is going after substantial growth opportunities; eMarketer estimates that the video market will grow by 29% annually to $8 billion by 2016.

So why the disappointment from Wall Street?

One problem might be Google (GOOG[14]). With its ownership of YouTube and the Android mobile operating system, the company is poised to squeeze large amounts of the profits from the market.

But perhaps the biggest issue is the fact that there’s little differentiation between Tremor and the spate of other ad networks, including Hulu, BrightRoll, Adap.tv, Videology and YuMe (YUME[15]). Getting public investors’ attention is difficult enough, but even more so when it’s difficult to show how your product stands out.

Not Ready: Bazaarvoice

[16]Date of IPO: 02/23/2012Return: -22%

Yesterday, Bazaarvoice (BV[17]) demonstrated the risks of the cloud as the stock plunged 17% on news of its disappointing earnings report.

Now it’s true that BV is in a hot industry, providing tools to analyze and improve brand marketing. Each month, the system manages the sentiment of more than 400 million people, and BV features a roster of top-notch customers that includes Macy’s (M[18]), Walmart (WMT[19]) and IBM (IBM[20]).

However, the social marketing industry is chock-full of rivals, such as Pluck, Reevoo, Gigya and Viewpoints, not to mention traditional agencies, and on top of that the potential for companies such as Google and Facebook (FB[21]) to leverage their massive platforms into a market entrance.

The other problem is that BV’s technology is not seen as must-have by customers. From Bazaarvoice’s 10-K:

“In particular, we believe our success will depend to a large extent on the willingness of brands to use online word of mouth in their marketing and advertising materials. Many of our potential clients remain hesitant to embrace our solutions, such as Ratings & Reviews, since they are uncomfortable displaying negative reviews about products or services offered on their websites.”

This likely is a key reason Bazaarvoice had a difficult time closing large enterprise deals in the future, and it’s a difficulty that isn’t showing signs of dissipating.

Tom Taulli runs the InvestorPlace blog IPO Playbook[22]. He is also the author of High-Profit IPO Strategies[23], All About Commodities[24] and All About Short Selling[25]. Follow him on Twitter at @ttaulli[26]. As of this writing, he did not hold a position in any of the aforementioned securities.